Effects of Office of the Superintendent of Financial Institutions’ measures expected to be contained to the first half of 2018 for most markets, but potentially damaging to those in a state of fragile recovery

TORONTO, January 10, 2018 – According to the Royal LePage House Price Survey[1] released today, Canada’s residential real estate market saw strong, but slowing year-over-year price growth in the fourth quarter of 2017. While year-over-year aggregate appreciation remained high in the Greater Toronto Area (GTA) and Greater Vancouver, two-storey and bungalow home values softened in the GTA, slightly declining on a quarter-over-quarter basis. Meanwhile, in both Greater Vancouver and the GTA, condominium prices continued to outpace all other property types, primarily due to growing affordability constraints within these markets.

The Royal LePage National House Price Composite, compiled from proprietary property data in 53 of the nation’s largest real estate markets, showed that the price of a home in Canada increased 10.8 per cent year-over-year to $626,042 in the fourth quarter of 2017. When broken out by housing type, the median price of a two-storey home rose 11.1 per cent year-over-year to $741,924, and the median price of a bungalow climbed 7.1 per cent to $522,963.

During the same period, the median price of a condominium appreciated faster than any other housing type studied, rising 14.3 per cent to $420,823 on a year-over-year basis. This trend was predominantly driven by the significant price gains witnessed in many of the country’s largest condominium markets. In the GTA, the median price of a condominium increased 19.5 per cent year-over-year to $476,421, while in the City of Toronto, the segment saw a similar gain of 19.6 per cent year-over-year to $515,578. In Greater Vancouver, condominiums also followed a similar price trajectory during the quarter, rising 20.2 per cent to $651,885, while the median price of a condominium unit in the City of Vancouver rose 18.7 per cent to $775,806. Many suburban markets across the GTA and Lower Mainland of British Columbia posted strong year-over-year condominium price gains of 20 per cent or more as well, with the segment appreciating at a faster rate than detached homes, which had previously led the charge.

“To prospective homeowners in our largest cities, condominiums represent the last bastion of affordability,” said Phil Soper, president and CEO, Royal LePage. “This is especially true for first-time buyers whose purchasing power has been reduced by tightening mortgage regulations.”

In looking at short-term national trends, condominiums were the only market segment to appreciate on a quarter-over-quarter basis among all housing types studied, rising 1.1 per cent in the final three months of the year. Meanwhile, the price of two-storey homes and bungalows were essentially flat, falling by 0.3 and 0.2 per cent quarter-over-quarter, respectively.

“Historically, condos have appreciated at a slower pace than detached homes, simply because supply constraints are easier to address, building upward uses much less precious land. For now, demand for those relatively affordable spots in the sky is so high that the trend has been reversed. As builders respond, new projects will come on-stream and condominium price increases will moderate somewhat. However, without hesitation, we can say Canada is now a condo nation, like other advanced economies around the world.”

In the GTA, year-over-year home price appreciation remained high in the fourth quarter, as the region largely held on to the growth generated in early 2017. However, the region showed signs of slowing in the final months of the year, particularly in the single-family detached segment. In the fourth quarter, the median price of a two-storey home and bungalow in the GTA decreased by 2.0 and 2.4 per cent on a quarter-over-quarter basis, respectively. When compared to the results reported by Royal LePage in the third quarter of 2017, year-over-year price gains in the two categories also fell from third-quarter increases of 22.5 per cent and 17.0 per cent to 13.9 percent and 8.3 per cent, respectively.

During the fourth quarter, the Office of the Superintendent of Financial Institutions (OSFI) published the final version of its new mortgage rules, which include a financing stress test for borrowers with uninsured loans, designed to ensure that home purchasers can withstand higher payments if interest rates rise. Royal LePage anticipates that the new measure, which took effect on January 1, 2018, will slow the housing market in the first half of the year, as buyers adjust their expectations and many market participants take a “wait and see” approach.

“The unsustainably high rates of home price appreciation witnessed in recent years in B.C. and Ontario were dangerous to the stability of not only the housing market, but to the broader economy itself,” continued Soper. “Policy measures like the OSFI stress test will quell runaway housing inflation to an extent. However, we do foresee an upswing in demand in the latter portion of the year, as prospective buyers adjust to the new realities. To put it another way, the demand is still there.”

“In the tug-of-war between a rapidly expanding economy and tough mortgage regulations, the economy wins,” said Soper. “The demand for new housing, be it for purchase or rent, is going nowhere but up.”

In the fourth quarter of 2017, Canada’s economy continued to expand, with both Ontario and British Columbia helping to lead the way, creating a large number of full-time jobs. This has created a significant demand for housing within the regions, insulating prices in the Greater Toronto Area, and pushing home values higher in Greater Vancouver, where inventory levels remain remarkably low.

“Insufficient housing supply and growing demand will ultimately offset the effects of tighter regulations,” Soper continued. “When focusing on Canada’s primary challenges in Greater Vancouver and the Greater Toronto Area, we see demand coming from three predominant categories: Peak Millennials,[2] who are now at the age of homeownership, international immigration, and the somewhat less-talked about interprovincial migration of households to Ontario and British Columbia from other parts of the country, attracted to these provinces because of their booming economies and gainful employment.

“On the flip side, the new OSFI measures could potentially be damaging in other regions that remain soft or in a fragile state of recovery,” continued Soper. “The Montreal economy is strong, and housing markets like Calgary and Edmonton, which have only recently passed the first stage of recovery, should be able to shoulder the burden of the new regulations as homes within the regions are appreciating in the healthy low to mid single-digit range. However, it will be slower going in other regions of the country.”

Any blanket national measure designed to temper demand can create difficulties for regions struggling to absorb housing supply, and may ultimately cause home prices to depreciate further. Saskatchewan and much of Atlantic Canada have still seen slight year-over-year price declines in the fourth quarter.

Price appreciation disparities between regions have created distinct challenges for Canadian policymakers attempting to repress overheated housing markets while minimizing unintended drags on slower ones. Royal LePage asserts that government efforts to support housing requires a coordinated federal, provincial and municipal approach, with a keen focus on the supply side of the equation in the country’s most populated regions, where housing shortages have put immense upward pressure on prices.

“The future of Canada’s urban centres will rely heavily on getting the housing stock mix right,” concluded Soper. “As condominiums continue to grow in demand and importance in Canada’s cities, it’s becoming increasingly imperative that real estate developers and policymakers support the creation of housing that addresses demographic trends, particularly as millennials start having children in increasing numbers. This creates a need for larger condominium units that are livable for families. Moreover, the future taxpayer costs of servicing and sustaining sprawling single-family homes in regions like Greater Vancouver and the Greater Toronto Area outweigh those associated with building upwards in our urban centres.”

In line with the company’s previous Market Survey Forecast, Royal LePage predicts that the price of a home in Canada will increase 4.9 per cent by the end of 2018. In the country’s largest markets, Royal LePage expects home price gains in the Greater Montreal Area, Greater Toronto Area and Greater Vancouver to grow by 5.5 per cent, 6.8 per cent and 5.2 per cent, respectively. Meanwhile, by the end of 2018, appreciation in Calgary and Regina is expected to slow slightly on a yearly basis to 2.3 per cent and 0.7 per cent, while Edmonton is forecast to depreciate modestly by 1.5 per cent over the same period. Royal LePage also reported 2018 forecasts for Halifax, Ottawa and Winnipeg, where it foresees home price increases of 2.5 per cent, 3.2 per cent and 4.0 per cent, respectively, in these markets.

Provincial and City Summaries and Trends

British Columbia continues to lead the country in economic performance, with all indications suggesting a pace of growth higher than many originally expected in light of the province’s August 2016 measures, which were implemented to cool the housing market. As of October, the unemployment rate in the province was 4.9 per cent, the lowest level since 2008 and the lowest rate in the country. Unsurprisingly, this strength combined with relative weakness in other western provinces is proving to be a strong draw for those seeking work. As of the year ended in September 2017, net in-migration to British Columbia from other provinces was almost 13,000, a figure second only to immigration into Ontario, adding more demand to the province’s largest housing markets.

In the fourth quarter of 2017, the aggregate price of a home in Greater Vancouver rose 8.2 per cent year-over-year to $1,267,769, demonstrating a renewed sense of consumer confidence following a slowdown, which lasted several months. In the City of Vancouver, the aggregate price of a home increased 12.0 per cent year-over-year to $1,480,712, while surrounding suburbs including Langley, Coquitlam, Surrey and Burnaby posted year-over-year price jumps of 12.8 per cent, 11.1 per cent, 10.7 per cent and 10.3 per cent to $886,073, $1,064,247, $844,869 and $1,115,541, respectively.

Following its economic woes in 2016, Alberta’s economy grew briskly in 2017, leading some to speculate that it was out-pacing all provinces in terms of growth. With oil prices surpassing the US$60 per barrel mark, production has ramped up along with an overall uptick in economic activity since 2016’s wildfires. Further to the energy sector rebound, Alberta is also seeing growth in manufacturing, retail sales, exports and residential construction, all of which are rebounding from 2016 levels. In December, the unemployment rate in the province was 6.9 per cent, down from 8.5 per cent a year earlier. By the third quarter of 2017, the province stopped losing population to other provinces and in-migration was positive for the first time since 2015. Alberta’s economic uplift also continued to strengthen the province’s housing market. In the fourth quarter, Calgary saw an aggregate home price increase of 4.4 per cent year-over-year to $479,352, while the aggregate price of a home in Edmonton rose 2.3 per cent to $386,532.

With energy prices on the rise, Saskatchewan reported a return to positive economic growth in 2017, after being mired in a recession since 2015. However, for 2017 as a whole, employment was virtually flat and full-time employment actually declined. This weakness in employment, combined with outward migration from the province, has delayed a housing market recovery in the region. Over the quarter, the aggregate price of a home in Regina fell 1.7 per cent year-over-year to $329,366, while the price of a home in Saskatoon decreased 2.2 per cent to $377,222 over the same period.

Manitoba’s economy enjoyed a solid expansion in 2017, with the province’s manufacturing sector looking strong, having been boosted by a robust U.S. economy and weaker Canadian dollar. As well, homebuilding activity is estimated to have increased 80 per cent during the first of the half of 2017, strengthening the province’s economic performance further. Overall, Manitoba has seen significant improvements to its labour force over the past year. As of December, year-over-year growth in employment was 2.1 per cent, and the unemployment rate fell to 5.7 per cent, matching the national average, a driving force behind the continued stability being seen in the province’s real estate market. In the fourth quarter, the aggregate price of a home in Winnipeg increased 3.9 per cent to $296,907.

The economic view for Ontario remains upbeat, with the province closing 2017 with a 2.8 per cent gain in GDP, according to its Fall Economic Statement. Employment in Ontario was up by 2.5 per cent (+176,000) in 2017, with full-time employment accounting for nearly all of the growth. As of December the province’s unemployment rate was 5.5 per cent, marking a drop of 0.9 percentage points over the year. Strong job prospects and the largest in-migration numbers across Canada, in conjunction with relatively constrained housing supply in many regions, helped maintain price gains across housing markets studied in the province.

Although home prices have noticeably moderated on a quarter-over-quarter basis, much of southern Ontario posted significant year-over-year price increases during the fourth quarter, holding on to the major gains achieved in the first part of 2017. In the fourth quarter of 2017, the aggregate price of a home in the Greater Toronto Area rose 14.0 per cent year-over-year to $837,873, while the City of Toronto saw an increase of 17.7 per cent year-over-year to $850,899. Surrounding suburbs such as Oakville, Brampton, Mississauga and Markham saw aggregate price increases of 14.2 per cent, 14.7 per cent, 12.7 per cent and 11.2 per cent year-over-year to $1,105,412, $709,071, $742,200 and $1,063,513, respectively. Meanwhile, in regions like Richmond Hill, home price appreciation slowed noticeably, with the aggregate price of a home increasing only 7.9 per cent year-over-year to $1,246,771, compared to double-digit gains in the previous quarters of 2017. Regions such as Kitchener/Waterloo/Cambridge and Hamilton also maintained substantial year-over-year home price growth, rising 24.6 per cent to $490,271 and 22.9 per cent to $554,399, respectively, while home prices in Niagara/St. Catharines and London grew 23.5 per cent to $394,794 and 19.6 per cent to $363,765, respectively.

Ottawa, the nation’s capital, continued to enjoy a stretch of strong economic growth, powered by increased federal government hiring and tourism in 2017 around the “Canada 150” celebrations. In the fourth quarter, the city saw a strong increase in its aggregate home price, rising 6.8 per cent year-over-year to $422,533.

Quebec remains one of the country’s top economic success stories, with 2017 seeing what appears to be the largest growth witnessed in the province in 15 years. According to the provincial government, in 2017, Quebec’s GDP grew 2.6 per cent, with industries such as public administration, manufacturing and services contributing to the gains. Although growth may decelerate slightly in the coming year, the strength of the U.S. economy bodes well for Quebec exports and manufacturing. In contrast to most provinces, the Quebec government now sits in a stable fiscal position and is running surpluses large enough that it can both increase program spending and cut taxes. The province’s employment picture has been remarkable this year, with Quebec adding 87,000 jobs, nearly all of them full-time. The provincial unemployment rate also dipped by 1.6 percentage point over the year, taking it to 4.9 per cent as of December, the lowest since Statistics Canada started tracking the current series in 1976. Remarkably, the unemployment rate on the island of Montreal fell by a full 3 percentage points over the past two years, declining to 7.3 per cent as of December 2017, which is expected to fuel strong housing demand.

In the fourth quarter, the aggregate price of a home in the Greater Montreal Area rose 6.5 per cent year-over-year to $388,011. Within the region, Montreal Centre once again posted the highest home price increases on the island, appreciating a notable 13.9 per cent year-over-year to $510,192. In other parts of the province, home prices in Quebec City, Gatineau and Sherbrooke rose 1.8 per cent, 3.1 per cent and 2.0 per cent year-over-year to $299,250, $265,759 and $246,081, respectively, while Trois-Rivières saw its aggregate home price decline 0.5 per cent year-over-year to $202,596.

In Atlantic Canada, economic conditions in 2017 were not as strong as the country’s national performance, with 2018 poised to be a more difficult year through most of the region. While Newfoundland and Labrador remained in recession in the fourth quarter, home prices in St. John’s remained relatively intact, with the aggregate price of a home in the city declining a moderate 2.0 per cent to $327,438. During the same period, all major cities in New Brunswick posted home price declines. Fredericton saw the largest decline, decreasing 4.5 per cent year-over-year to $233,165, while the aggregate home price in Moncton and Saint John dropped 1.3 per cent and 0.6 per cent to $177,928 and $206,134, respectively. Nova Scotia showed the strongest economic performance in the region in 2017, and maintains the highest growth prospects for 2018. In the fourth quarter, the aggregate price of a home in Halifax rose a healthy 4.2 per cent year-over-year to $319,891. In Prince Edward Island, Charlottetown saw the highest year-over-year price gains of any region in Atlantic Canada of 5.8 per cent to an aggregate price of $240,441, as the region maintains stability and international interest.

The Royal LePage House Price Survey provides information on the three most common types of housing in Canada, in 53 of the nation’s largest real estate markets. Housing values in the House Price Survey are based on the Royal LePage National House Price Composite, produced quarterly through the use of company data in addition to data and analytics from its sister company, RPS Real Property Solutions, the trusted source for residential real estate intelligence and analytics in Canada. Commentary on housing and forecast values are provided by Royal LePage residential real estate experts, based on their opinions and market knowledge.

About Royal LePage

Serving Canadians since 1913, Royal LePage is the country’s leading provider of services to real estate brokerages, with a network of close to 18,000 real estate professionals in more than 600 locations nationwide. Royal LePage is the only Canadian real estate company to have its own charitable foundation, the Royal LePage Shelter Foundation, dedicated to supporting women’s and children’s shelters and educational programs aimed at ending domestic violence. Royal LePage is a Brookfield Real Estate Services Inc. company, a TSX-listed corporation trading under the symbol TSX:BRE.

[1] Aggregate prices are calculated using a weighted average of the median values of all housing types collected. Data is provided by RPS Real Property Solutions.

[2] The term “Peak Millennial,” first coined by U.S. economist Dowell Myers, is used by Royal LePage to describe the largest cohort of millennials born between 1992 and 1998. For the purposes of homebuyer research, Royal LePage focuses on Peak Millennials who are 25 years of age and over. Royal LePage released its inaugural Peak Millennial Survey on August 17, 2017.

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